Plans by the Labour government to redirect billions in council funding towards its traditional heartlands have sparked warnings of widespread council tax increases across the United Kingdom. Leading economists cautioned last night that the controversial policy could force almost half of all local authorities to raise taxes, even if they implement the maximum permissible hikes.
The 'Fair Funding' Formula and Its Redistribution
The provisional local government finance settlement, unveiled by the Ministry of Housing, Communities and Local Government, outlines a significant shift in how money is allocated. For the 2026-27 financial year, almost £78 billion will be distributed to councils, a figure set to rise to approximately £85 billion by 2028-29.
However, the new formula, championed by Deputy Prime Minister Angela Rayner, dramatically alters where this money flows. Under the so-called 'fair funding' model, the most deprived 10% of councils will see their average spending power per head surge by 24%. In stark contrast, the wealthiest areas will receive an average increase of just 6%.
This means over the next three years, the poorest local authorities will effectively receive quadruple the funding increase compared to the most affluent. The government argues this corrects a historical imbalance, noting that currently, a multi-million pound property in Westminster can attract a lower council tax bill than a standard family home in towns like Blackpool or Darlington.
Unlimited Tax Rises and Financial Pressure
The most immediate consequence is severe financial pressure on councils in wealthier regions. The Institute for Fiscal Studies (IFS) has warned that with council finances already strained by rising costs and service demands, the government will find it hard to 'hold the line' on limiting major tax increases.
Specifically, six council areas will be granted powers from 2027 to raise council tax beyond the current annual cap of 5% without holding a local referendum. The councils identified are:
- Wandsworth
- Westminster
- Hammersmith and Fulham
- City of London
- Kensington and Chelsea
- Windsor and Maidenhead
Kate Ogden, a senior research economist at the IFS, stated: 'The Government may find it hard to hold the line that limit-busting council tax increases will only take place in "exceptional cases" and where bills are currently below average.'
Political Backlash and the 'Council Tax Bombshell'
The policy has ignited fierce political opposition. Shadow local government secretary Sir James Cleverly accused Labour of 'launching a nakedly political power grab' disguised as fairness. He projected that the move is part of a broader mission to hike taxes, claiming the average family in a Band D home could face a cumulative council tax increase of £1,143 over the course of the Parliament.
Defending the proposals, Local Government Minister Alison McGovern argued the change ends a subsidy for ultra-low bills in the wealthiest areas. 'By choosing not to subsidise very low bills for the 500,000 households in these places, we will provide £250 million more funding for places with higher need,' she said.
The reforms set the stage for a major battle over local government finance, with residents in both deprived and affluent areas facing significant changes to their council tax bills as the new funding landscape takes shape.
